The European Commission published its new Digital Finance Strategy on 24 September 2020. One of its centrepieces is the draft Regulation on Markets in Crypto-Assets (MiCA), designed to provide a comprehensive regulatory framework for digital assets in the EU. In our working paper ‘The Markets in Crypto-assets Regulation (MiCA) and the EU Digital Finance Strategy’ we analyse MiCA in the context of existing EU financial regulation.

The new Digital Finance Strategy (DFS) is part of a broader approach to the future development of digital finance and innovation in the EU, embodied in a new Digital Finance Package. The new Package comprises this new DFS and a renewed Retail Payments Strategy in an effort to ‘boost Europe’s competitiveness and innovation in the financial sector, paving the way for Europe to become a global standard-setter.’ By pursuing enhanced consumer choice while at the same time ensuring consumer protection and financial stability, the Commission ‘aims to boost responsible innovation in the EU’s financial sector, especially for highly innovative digital startups, while mitigating any potential risks related to investor protection, money laundering and cybercrime’.

The new DFS provides a very broad and comprehensive framework for future reforms to further the development of digital finance in the EU. While some of its building blocks were sketched out in the EU Commission’s FinTech Action Plan of 2018, the DFS represents a major step forward. In particular, the DFS promises new proposals on prudential regulatory treatment of crypto-assets, on SME financing, and on the role of distributed ledger technology (DLT) and the Internet of Things (IoT). It also provides support for a possible central bank digital currency (CBDC) from the European Central Bank (ECB), which was the subject of a separate ECB report published later the same week.

The most developed aspects of the DFS at this stage are the legislative proposals for an EU regulatory framework on crypto-assets to support passporting for innovative startups across the EU, including in relation to crypto-assets. These include the proposal for a new regulation on Markets in Crypto-Assets (MiCA) and a new proposal for a Regulation on a Pilot Regime for Market Infrastructures based on Distributed Ledger Technology (DLT Infrastructure Regulation). While MiCA deals with crypto-assets (understood as ‘a digital representation of values or rights that can be stored and traded electronically’), the DLT Infrastructure Regulation is described as introducing a ‘sandbox’ approach for DLT-based market infrastructures, which allows temporary derogations from existing rules to assist regulators in gaining experience.

MiCA is the EU’s response to the policy debate prompted by the Libra proposal in June 2019. With it the EU Commission has proposed bespoke regulation for utility tokens and stablecoins including payments tokens, asset-backed tokens and ‘significant’ stablecoins (including ‘global stablecoins’). As to investment and securities tokens, the EU DFS relies on the existing body of EU financial and securities law, with the Prospectus Regulation, the MiFID framework and UCITSD and AIFMD at its core, with the intention to incorporate necessary changes as part of existing ongoing amendment and review processes. MiCA provides for a bespoke prospectus regime for crypto-assets, while the issuing of e-money tokens (ie payment tokens), asset-referenced tokens (also known as stablecoins) and crypto-asset services would become regulated activities subject to licensing. Supervision of crypto-asset service providers (CASPs) will rest with national authorities, whereas supervision of ‘significant’ asset-referenced and e-money tokens will rest mainly with the European Banking Authority. Thus, with MiCA, the question of how the market for crypto-assets will be regulated under EU law is now answered.

We find that the EU DFS marks a very important step for the EU in developing both innovation and the Single Market. MiCA is an ambitious legislative project that responds to an urgent policy need. Yet the need was entirely different for ‘simple’ crypto-assets on the one hand, and payment tokens on the other hand.

Simple crypto-assets under MiCA will, in principle, be primarily utility tokens (perhaps with some monetary component), as other tokens will be subject to the existing body of EU law. For these other types of tokens, investor protection may warrant legislative intervention, with a strict application of existing EU financial law—and the definition of ‘financial instrument’, in particular—providing the alternative. While MiCA clearly fills any (perceived) gap, it fails to meet the second policy goal in the European Single Market: a harmonized application of EU financial law concepts across all EU and EEA Member States. The MiCA route is apparently easy, but its practical repercussions may well enrich lawyers and infuriate market participants for years. Thus, we propose that guideline-issuing competence should be conferred upon ESMA (as the authority in charge of financial instruments) to ensure a harmonized application of EU financial law.

The regulation of payment tokens, on the other hand, is well justified from a financial stability perspective given that a well-functioning payment infrastructure lies at the heart of all financial systems. In this regard, MiCA has indeed filled a gap, often by leaning on existing rules of the E-Money Directive. While this approach may be justified for small token offerings, it does not provide a suitable legal environment for truly large global stablecoins of global importance. We recommend the insertion of cooperation mechanisms similar to systemically important market infrastructures of international importance with regard to global stablecoins.

More broadly, MiCA does not stand on its own but is part of an ambitious and comprehensive approach of the sort we view as essential. However, further substantial revision of its detailed provisions, in the ways outlined in our paper, will be necessary if MiCA is to achieve its various goals.

Dirk A. Zetzsche is Professor of Law, ADA Chair in Financial Law and Inclusive Finance, Faculty of Law, Economics and Finance, University of Luxembourg.

Filippo Annunziata is Associate Professor at the Department of Law at Bocconi University, Milan.

Douglas W. Arner is Kerry Holdings Professor in Law and Director, Asian Institute of International Financial Law, Faculty of Law, University of Hong Kong.

Ross P. Buckley is Scientia Professor, and the KPMG Law – King & Wood Mallesons Professor of Disruptive Innovation and Law at UNSW Sydney, Australia.